yet another as allowDefinition='MachineToApplication' beyond application level; tried ALL other,good explanationg given

yet another as allowDefinition='MachineToApplication' beyond application level.
i have created apps in .net 2003 and .net 2005 and both frameworks are on my server 2003 / iis6 machine.

it always been a mission to get .net apps working on this classic asp setup and today i have spent more than 8 hours on this so far.

all the other googled solutions say:
check the web config in backup folder /
make sure the virtual directory is an application / etc.

now ive done it from scratch: i've "published" the website in 2005 VS to a folder.
my website is for e.g. abc.co.uk.
i now made a folder NewProg in the C:\Inetpub\wwwroot\abc folder. (this root folder does not have an app.config).
now i just make the abc folder a virtual directory (haven't set the app yet).

i now make the folder an application [create button].
i now have this setup in IIS:
-abc
-oldprog [App]
-oldprog2 [App]
-newprog [App]

i now go to abc.co.uk/newprog/login.aspx on local browser:
Parser Error Message: It is an error to use a section registered as allowDefinition='MachineToApplication' beyond application level. This error can be caused by a virtual directory not being configured as an application in IIS.

i now go to abc.co.uk/newprog/login.aspx on remote PCbrowser:
custom error etc

i again metion there is no web.config in abc root, and no web.config in any subfolder of newprogram

i now remove the web.config file in newprogram. now for the first time, the login page actually displays, but when i try to login, i get the error that the password is incorrect [im using forms authentication with the username/passwords in the web.config] obviously because the web.config isn't there.
but still the page actually loaded now. if i try another page, i get the error:
Could not load the assembly 'App_Web_vxxxx'. Make sure that it is compiled before accessing the page. This is because the app.config isnt there.

i searched for other web.configs. there are only in the oldprog and oldprog2 folders.
the version of .net is 2.0xxxx which is correct and the problem is not there.

like i said : when i remove the web.config i can actually view a page (that doesnt refer to files in app_data). when i put it back, i get the error.
this would tell me that i have another web.config in the parent of newprogram.
i dont.
the default web site [under IIS-> Websites] has wwwroot set as an app, but that doesnt bother oldprogram to work, so it shouldn;t bother newprogram to work either.

i cannot for the love of programming get this, please help, theres a lot at stake.

If you right click on the web site or the virtual folder for the web application is the 'Application Name' disabled (greyed out)? If yes, you didn't designate the folder as an application just like the

If you right click on the web site or the virtual folder for the web application is the 'Application Name' disabled (greyed out)? If yes, you didn't designate the folder as an application just like the message says.

Select the [Create] button to make it an application which assigns a application pool to the folder so that it can run as a web application.

we have another website, using the same file system, e.g. abcd.co.uk.
i have now tried adding the newprogram virtual directory to it, and making it an app, this works fine, but it still shows the same error when i try to run it.

i then compared the web.configs.
in the faulty version, i took out this line :
<compilation debug="true">
<assemblies>
<add assembly="WindowsBase, Version=3.0.0.0, Culture=neutral, PublicKeyToken=31BF3856AD364E35"/>
</assemblies>
</compilation>

now everything (almost everything) works. really funny stuff, the only part that i still get the error on is on a page where i create .docx files with MemoryStream & Package & PackageRelationshipCollection. i must prob install .net 3.5 on the webserver

Here are the symptoms:
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